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Bauer on Culture and the Great Enrichment

By
Deirdre N. McCloskey

I first commented on P. T. Bauer 30 years ago, at a point I
optimistically thought was his “resurrection” as a voice in the
fraught field of development economics. I wrote in 1987 that his
“story follows William James’s three stages in the rhetoric of
academic disputes: at first what Bauer says is plainly false; then
it is trivially obvious; and finally it is so true that we, not he,
invented it” (McCloskey 1987: 253). By now
the joke has come true. Some of us have forgotten, but many now
know, that Bauer invented in the 1950s and 1960s, reiterating
later, what has become trivially obvious from the experience of
China and India, Ireland and Botswana — namely, that leaving
people alone, while assigning the government to the few if
important tasks that do not obstruct opportunity, is the path to
wealth. What does not work is “socialism with Chinese
characteristics,” that is, political tyranny and unprofitable
governmental enterprises. The economic liberalism of the
competition for business among Chinese xians is what
worked, leaving people alone to innovate, just as Bauer would have
said (Coase and Wang 2013, and the later
works of S. N. S. Cheung).

Bauer: A Classical Liberal

As Bauer remarked about his book of 1954 at its reissue in 1963,
“the discussion of price stabilization and of the operation of the
marketing boards [anticipating the political scientist Robert Bates
(1989)] aroused much controversy at the
time, but the analysis and the conclusions are no longer disputed”
(Bauer [1954] 1963: xviii-xix). Likewise
his views about the corrupting effects of foreign aid, anticipating
those of the political scientist Edward Banfield (1963), and more recently the economist William
Easterly (2001), as Easterly has admitted,
is now no longer much disputed.

Yet it seemed to us lefties of the early 1960s to be plainly
false. Surely the way to wealth in Ghana, we thought in our
admiration for Kwame Nkrumah, is giving massive aid to the Ghanaian
government, out of, say, Norwegian taxes. Anything less would be
cruelly selfish. Shame on you conservatives and classical liberals
who doubt. But in 1954 when he was criticizing what Easterly nearly
50 years later called, appropriately, the “capital fundamentalism”
of the World Bank and other foreign aiders (Easterly 2001), Bauer wrote: “the comparative lack
of local technical and administrative skills aggravates the effects
of the scarcity of equipment… . For this reason indiscriminate
import of capital, or even substantial capital accumulation in the
hands of public organizations, alone would not necessarily improve
the situation” ([1954] 1963: 13).

Bauer’s great advantage was that unlike many economists he
understood “price theory,” as we called it in the good old days at
the University of Chicago (e.g., McCloskey
1985). That is, he understood the way an economy works through
scarcity, entry, and supply and demand curves. Back in 1848 the
field of economics, or rather “political economy” as it called
itself then, had a reasonable grip on such matters, which guided
liberals such as Mill and Bastiat and Cobden. The grip was
strengthened by the marginal revolution in the economics of the
1870s.

But the 1870s was also the era in which theories of American
protectionism and British New Liberalism and the German Historical
School among other anti-economic movements started to take hold
outside the price-theoretic and British/Austro-Hungarian core of
the field. By 1975, Bauer noted with irritation,

Some economists holding senior academic positions
confuse free goods and scarce resources [e.g., in thinking that
development spending is a net addition to national income,
regardless of its opportunity cost], ignore the dependence of
supply and demand on price [e.g., speaking of the numerical
“structure” of jobs or exports or the balance of payments without
regard to their sensitivities to price elasticities of supply and
demand], or neglect patent empirical evidence pertinent to their
arguments [e.g., evidence of entry at the pull of profit] [Bauer 1975: 287].

Bauer was therefore not misled, as so many economists are, by
the litany of “imperfections” in the market, of which I have
recently counted fully 110 imagined since 1848 — monopoly,
externalities, inadequate aggregate demand, irrational consumers,
informational asymmetries, and on and on, recently bearing fruit in
many a Nobel Memorial Prize (McCloskey
2018a). Not one of them — startlingly in what purports to
be a serious empirical science — has been shown to be a
substantial obstacle to economic progress, except on the
blackboard. All are used to recommend corrective governmental
action by saintly geniuses able to predict and therefore to
engineer the future without flaw for the good of us all. As Comte,
the master of such thinking, put it in 1830, Savoir pour
prévoir, afin de pouvoir, “Know in order to predict, to be
able to act with power” in the state. Meanwhile the highly
“imperfect” economy, chiefly by ignoring the statist advice of the
increasing number of illiberal economists, yielded a Great
Enrichment from 1800 and especially from 1848 to the present of
3,000 percent more goods and services for the poorest among us,
uniquely in economic history.

The behavioral economist Richard Thaler is the best example of
an un-Bauerish and illiberal approach to price theory and practice
that human frailty is likely to yield (McCloskey 2018b). He combines the 110
imperfections of the market with the 257 cognitive biases that the
psychologists have discerned.1 He concludes that without governmental
help we cannot be trusted to walk across the street, and certainly
not to make any serious economic decisions, considering that the
imperfection-crippled market will not offer us useful protections
from our idiocy. Therefore we need to be nudged to safety, like a
two year old grabbed by his mother before he carries out his
intention to run in front of a tram. The conclusion by most
economists of the past century has been that we are little
children, or idiotic adults, and need to be economically
engineered, by those very economists. We naïve statists in the
1960s called it “fine tuning.” Now “nudging.” In other cases,
socialism and fascism.

Like the agricultural economist and Nobelist at the University
of Chicago, Theodore Schultz, and a few other brave souls writing
in the 1950s and 1960s, Bauer didn’t think that people in poor
countries were little children or in other ways idiotic (Schultz 1964). For example, Bauer did not believe
the racist assumption, widely if sometimes unselfconsciously held
in the 1950s and 1960s, that Africans or Indians or whoever could
not possibly achieve the Great Enrichment of 3,000 percent,
available only to Europeans sporting melanin-challenged skin. We
young students of economic development in the 1960s, at any rate if
we were not studying at the London School of Economics or Chicago
with Peter Bauer or B. S. Yamey or Theodore Schultz, were taught
that such folk would never grow rich, that they were caught in a
low-level trap of the sort that Professors Myrdal and Nurkse
exposited. After all, the Indians were mostly Hindus, or at best
Muslims, and many of them in the south of India were dark fellows
who could not possibly develop a world-supplying computer-service
industry. The same held for the Chinese, those hopeless Confucians
or Communists, and in any case, you will note, yellow, who could
not possibly develop a world-supplying electrical-machinery
industry.

Bauer, in other words, was a classical liberal at the height of
a statism of the left or the right or the middle.

A Social Scientist as Well as a Price Theorist

But he was also a social scientist of his age, I think, in
taking cultural obstacles as more powerful than subsequent
experience suggests. Thus too Edward Banfield in his dismal,
classic study of the “amoral familism” of Italy south of Rome
(1958), followed by Robert Putnam and
coauthors in their dismal, classical study of the same place
(1993), felt that the South was hopelessly
trammeled by its culture, and would always be. No reining in of bad
governmental policy could solve the puzzle of culture inherited
from the past. The Italian party of separation, once called
Lega Nord per l’Indipendenza della Padania (“North League
for the Independence of Padania,” that is, of the Po Valley),
believes the same to this day; and there has long been respectable
opinion in the study of Italian history that the unification of the
peninsula in the Risorgimento was a mistake (Mack Smith [1958] 1997).

Against the Banfield-Putnam pessimism about the South, though,
it can reasonably be suggested — and I would in fact suggest
it on the basis of recent experience such as China’s and India’s
unavailable to such observers — that a more thorough
liberalization of the peninsula would change the picture radically,
despite the culture. After all, when Italians moved to New York or
London from the Mezzogiorno in great masses, they did very well
within a couple of generations. Italian Americans had by the 1970s
the third highest rate of university graduation by ethic group,
third only to Jews and Irish — both of whom in their turn had
been despised as incorrigible in their inherited culture. The
optimistic case can be suggested, too, against Bauer’s similar
pessimism about poor countries more widely: when Indians and
Chinese moved to places in which they were permitted to have a go,
they also flourished, yet did not abandon their culture. As Bauer
in another mood had said.

Consider a radical liberal policy for Italy. If the Mezzogiorno
broke off from Italy, or was rudely broken off, and in particular
broken off from the massive subsidies it now receives annually from
Rome for its Rome-approved vote, and sat on its own bottom, a
true-believing classical liberal would expect it to prosper
mightily. Sicily is not inconveniently located for sea trade, for
example, and its sons and daughters in America have done
exceptionally well.

After all, what is in effect foreign aid from the North, Bauer
had said in 1977 about “technological” free lunches to be given to
India, has the problem that it, like power, tends to corrupt. “When
those who have to pay for the technology [or in the Mezzogiorno’s
case to pay for an autostrada to nowhere] spend their own
resources, they are far more likely to purchase it [viz., the
technology or the autostrada] selectively and in
accordance with considerations of costs and feasible alternatives”
(Bauer 1977: 154). The corruption from
free money is elementary price theory, denied by many economists
who, as Bauer elsewhere remarked in one of his stiletto footnotes,
believe that “acceptance of nonsense may be necessary for
participation in political decisions” (Bauer
1975: 312n29).

Yet early and late Bauer emphasized the obstacles that culture
posed to the Great Enrichment of poor countries. He complains of
John Hicks’s economistic theory of economic history that “neither
religion nor any other belief is mentioned as influencing either
conduct or social institutions” (Bauer
1971: 166). Bauer believed that caste in India and witchcraft
in Africa posed major obstacles. Of India he wrote in 1961 for
example, in a surprisingly conventional way, about “the
contemplative, non-experimental, uncurious, and fatalistic outlook
of large sectors of the Indian population, especially the rural
population and certain sectors of the intelligentsia” (Bauer 1961: 26). True, in accord with price theory
he hastened to add that “it should not be inferred … that the
propositions of economics are irrelevant to India … . The Hindu
peasant will not kill a cow, but he will sell his output where he
can get the highest price” (ibid., 28). Yet at about the same time,
by contrast, the Indian professor of English literature Nirad
Chaudhuri (1959: 178) pointed out that
Christian England was actually less profit-oriented in its
prayer for daily bread than was the daily Hindu prayer to Durga,
the Mother Goddess: “Give me longevity, fame, good fortune, O
Goddess, give me sons, wealth, and all things
desirable.”2 The businessman
and public intellectual Gurchuran Das notes that the second stage
of a worthy Hindu life is that of the householder: “The dharma
texts recognize the value of the second stage, which was the
indispensable material basis of civilization”(Das 2009: xxxiv).3 Among the successive goals for a
flourishing life in Hinduism is “a second goal …
artha, ‘material well-being,’ which makes sense, for how
can one be happy in conditions of extreme deprivation?” (ibid.,
xxxviii). How indeed?

Most social scientists in the 1950s and beyond looking at Holy
India — and, I am saying, Bauer, too, despite his
well-reasoned attacks on such a conventional view — saw only
vicious circles of poverty (see Bauer
1965). During the 40 years after independence such a rhetoric
of a Gandhi-cum-London-School-of-Economics socialism held the
“Hindu rate of growth” to 3.2 percent per year, implying a
miserable 1 percent a year per person as the population grew. Nehru
wrote with satisfaction in 1962 that “the West also brings an
antidote to the evils of cut-throat civilization — the
principle of socialism… . This is not so unlike the old Brahmin
idea of service” (quoted in Lal 2006: 166).4

At last, however, such anti-commercial rhetoric derived from
European thought of the 1930s and “the old Brahmin idea of service”
faded. A profiting and bettering rhetoric took root in India,
partially upending the “License Raj,” as the Indians described the
44 years after Independence (Adhia 2010,
2013). A third of a million Indians
subscribe to the fortnightly Indian magazine Business
Today, founded in 1992, which contains breathless articles
praising enterprise. And so India commenced, after liberal
economists took charge in 1991, to increase the production of goods
and services at annual rates shockingly higher than in the days of
five-year plans and corrupt regulation and socialist governments
led by students of Harold Laski. By 2008 Indian national income was
growing at fully 7 percent a year per person. Birth rates fell, as
they do when people get better off and therefore have access to
birth-control devices.

After 1991 and Singh’s liberal allies, though, most of the
culture didn’t change, and probably won’t change much in
future. Economic growth, as the Japanese have long shown, does not
entail becoming identical to Europeans. Unlike the British, the
Indians in 2030 will probably still give offerings to Lakshmi and
the son of Gauri, as they did in 1947 and 1991. Unlike the Germans,
they will still play cricket, rather well. And in 2050, after
merely two generations at the rates of growth possible for
economies launching on the Great Enrichment by adopting liberal
economic policies, average income will have risen by a factor of
fully 16 over what it was in 2008. The level will then be well over
what it was in the United States in, say, 2003. Even by 2050 in
much of their talk and action the Indians will not have the
slightest temptation to become like Chicagoans or Parisians, any
more than the once appallingly poor southern Italians have taken on
an American style of driving or a British style of food, though
they are now by international standards rich. The Italians even of
the Mezzogiorno did, however, adopt in part a northwestern European
rhetoric about the economy, as the Indians have largely now. They
entered the modern world, and the modern word, of a bourgeois
civilization, and were made the better for it, materially and
spiritually. And most assuredly, I say again, their rich cousins in
the United States, or United Kingdom, or Australia had done so.

Bauer insisted on cultural pessimism. In a review of the dismal
effect of Marxism on theories of economic development, he declared,
contrary to what “both Marxists and non-Marxists often believe,”
that “men are obviously not equally endowed by nature in physical,
intellectual or economic capacities” (Bauer
1975: 304). Yet such a truth considered individual by
individual does not imply that groups are so radically unequal in,
say, economic capacities. At the least they have plenty of outliers
in their number with entrepreneurial tastes. Growth can occur, if
given a liberal chance.

The worry about culture and the optimism about price theory
create a persistent tension in Bauer’s work that one does not see
for example in the more cheerfully optimistic work of his American
ally I have mentioned, Theodore Schultz. For example, on the last
page of Bauer’s Indian Economic Policy and Development, he
says again, as he had said throughout the book, that “criticism of
Indian economic planning … should not be mistaken for a plea
for governmental inactivity in economic and social life” (Bauer 1961: 141). He says it, I suppose, to fend
off the accusation of anarchism that has come so easily to the lips
of indignant statists since the Great War.

Admittedly, then he immediately takes it back: “what is required
in India is essentially a redirection of the activities of
government, away from policies restricting the energies and
opportunities of its subjects, and away from acts of emulation of
the pattern of the Soviet world” (ibid.). The choice, he says in
the last sentence in the book, was between ”the development of the
opportunities of the people” and “the establishment of a socialist
society.” Yes. It is no accident that the optimistic part of
Bauer’s advice started to be heeded only after the fall of the
Soviet Union, a few years after my premature announcement of his
“resurrection. The ideological veil over socialism’s inefficiencies
and injustices put up after the Great War fell to the ground. Bauer
was risen from the dead.

And Bauer was fiercely opposed to the notions of vicious circles
of poverty such as Myrdal and Samuelson believed. In his 1975 essay
his target becomes clearer, and the apparent tension I am pointing
to is partially resolved. On the one hand he deprecates “the
suggestion that the economic capacities of people are substantially
equal, and differences reflect political manipulation or
exploitation” (Bauer 1975: 311). But he is
claiming that the egalitarianism he does not favor is used to
justify, he thinks, socialist and protectionist excesses. But he
also makes the point, as I have emphasized, that overseas Indians
do just fine (Bauer 1961: 28), which
suggests that culture can’t be it. And he views as disastrous
Indian policies such as minimum wages (ibid., 92-93) and central
planning (chaps. 2-6, which is to say most of the book). “The large
reserves of human energy and talent,” so evident to us now in the
growth of India after 1991, were “inhibited by the restrictive
forces of custom,” to be sure, but “enhanced [that is, made worse]
at present [in 1961] by the restrictive effects of government
policies” — the License Raj and the attempts to apply social
democracy straight away.

That is, Bauer was not quite as much of an egalitarian,
optimist, and thoroughgoing liberal as was, say, Adam Smith. Smith
(1755) believed, “Little else is requisite
to carry a state to the highest degree of opulence from the lowest
barbarism, but peace, easy taxes, and a tolerable administration of
justice; all the rest being brought about by the natural course of
things” (quoted in Stewart 1812: IV, 25).

The Tension between Bauer and Hicks

It is quite typical of the imperfectionist and statist habits of
economics since 1848 — being in this quite unBauerish —
that the political scientist Barry Weingast in quoting the famous
sentence by early Smith adds the magic word for statists,
“infrastructure”: “If peace, easy taxes and a tolerable
administration of justice represent the market-supporting
infrastructure necessary to sustain markets, just how does this
infrastructure come about?”5
Pointing to the Lectures on Jurisprudence (1762-63),
assembled from notes by Smith’s students and finally printed in
1896, Weingast replies, “Markets without legal infrastructure work
poorly at best and fail to develop in the absence of contract
enforcement, secure property rights, and the division of labor. No
so-called invisible hand has transformed modern sub-Saharan Africa
or South Asia into rich, developed countries.” Yet it is doing so
now.

Weingast has argued on many other occasions that the visible
hand of government supplies what growth needs.6 True, nonpredation by the very state is
necessary, the “peace, easy taxes, and tolerable administration of
justice” Smith spoke of. All of them are activities of government
whose lack will indeed crush individual ingenuity. But to make out
of this a claim that government must supply at first an
“infrastructure” is to give to government an active role contrary
to “all the rest being brought about by the natural course of
things.” True, Bauer (1961: 12) emphasized
in the brief introduction to Indian Economic Policy and
Development that “economic development [does] not emerge
directly from the operation of market forces.” Yes, law is
necessary. But China for centuries had peace, easy taxes, and a
tolerable administration of justice, but without the liberal regime
allowing ordinary people to have a go that Smith was
recommending.

John Hicks, whom Bauer criticized sharply in his review in 1971
of Hicks’ A Theory of Economic History (1969), believed that economic history “has a
recognizable trend” (p. 7 of Hicks). Many economic and other
historians assume it does have such a trend, of steady, gradual
improvement. For instance, the group of excellent economic
historians contributing to the Maddison Project do so, at any rate
implicitly. They see English economic history of the past
millennium as culminating, slowly, slowly, in the Industrial
Revolution. But in fact the Great Enrichment, the follow-on to an
industrial revolution not notably different from earlier
efflorescences, as Jack Goldstone calls them, was an astonishing
discontinuity, long, long after English law reigned, within
occasional periods of peace among the quarrelsome British (Goldstone 2002). A Rise of the Market spread over
centuries is a false explicandum. As archaeologists are beginning
to discover from the earliest remains, we Homo sapiens exhibit
markets. At least since the Middle Stone Age, an era receding in
time with each new discovery, humans have imported shells for
decorations and obsidian for spear points.

Again, Bauer agrees with Hicks, and with many others, that what
Hicks calls a “custom and command” or “revenue” (for the lords)
economy gave way in, say, the 17th century to a “mercantile”
economy, and also agrees with Hicks that we at last seem to be
returning to command and revenue, if not custom (Bauer 1971: 166-67). The chart of rise and fall
resembles, with some adjustments in timing, Karl Polanyi’s
(1944) “double movement,” from tradition
to market to socialism. None of it, however, fits with the best
historical research since Polanyi wrote. Close study of medieval
peasants, for example, finds them, as Bauer would have expected in
some moods and Theodore Schultz in all moods, acting rationally
within their constraints (McCloskey
1976).

What was special, and discontinuous, was the abrupt rise of
liberalism in the 18th century. In my trilogy on the “Bourgeois
Era” (McCloskey 2006, 2010, 2016), I have
chronicled the rise and its astonishing consequences. It inspirited
widening masses of people, formerly indistinguishable from the most
tradition-bound peasants of India and China, to have a go.
Innovation exploded after 1800 in places like Britain or the United
States and then more widely: mechanical reapers, railways, steel
ships, electricity, forward markets, steam presses, universities,
the germ theory, automobiles, autobahns, airplanes, ball points,
containerization, the pill, the computer, the internet. One can try
to make the ingenuity endogenous to the economy by claiming that
liberalism itself arose in part from the success of the early
mercantile economy around 1700. It seems doubtful, considering that
mercantile economies existed for centuries from Tlatelolco in
Mexico to Osaka in Japan, and as Bauer observes from Phoenicia and
Carthage to modern times, without any sort of liberalism springing
up.

In other words, thanks to the rise of liberalism the optimism of
Hicks about economic growth, which struck Bauer in his pessimistic
moods as quite absurd, proved in the end to be correct. Hicks
(1969: 157) spoke of “a couple of
generations” as sufficing. He had signed on, it would seem, to the
“analytical egalitarianism” that Sandra Peart and David Levy
(2008) have traced to the 18th century
social theorists, especially Smith. Bauer expressed vexation with
such a hypothesis, here and at many places in his writings: “Hicks
does not even so much as hint at possible differences in faculties,
attitudes, mores and institutions anywhere in the world, in the
past or in the present” (Bauer 1971: 171;
his vexation led to a rare slip in his late-learned and usually
amazing mastery of English, the redundancy of “even so much as”).
Hicks had pointed to protectionist policies in poor countries as
the main obstacle to growth, to which Bauer responds indignantly
that “it is surely naïve to suppose that their abandonment would
invariably bring about early and substantial material progress”
(ibid., 172). He announces an alternative hypothesis: “Recognition
of the relevance of economic policies should not obscure the limits
set by parameters usually regarded as non-economic.” In 1977 he
disparaged again the “idea or assumption that individuals, groups
and societies are approximately equal as potential economic
performers” (Bauer 1977: 144).

Let us test it. The world’s laboratory for protectionism has
been Latin America after Juan Peron in politics and Raul Prebisch
in economic theory. Latin America has had plenty of apparent
noneconomic limits, such as native traditions and swollen
militaries. But when the experiments in freer trade were tried,
they regularly brought about early and substantial material
progress (Reid 2017). And the biggest
experiment has been in China and India, with similar results.
Hicks’s two generations do not look at all improbable set beside
the history of the Asian Tigers, or the Celtic one, and above all
China and India growing since 1978 and 1991 at 7 to 10 percent per
year per capita. At 7 percent per year, of course, income
quadruples in a generation of 20 years, and increases by a factor
of 16 in merely two such generations.

Conclusion

No one would deny that deep ignorance as much as charming
customs can obstruct the choices that Bauer put in the midst of his
account of growth. But ignorance and custom are not always
permanent. They can change, sometimes with startling speed, in
which case the conditions that Bauer thought so sluggish can become
suddenly favorable. And choice — the profit motive that even
a mere consumer exercises when she is free — can overwhelm
the ignorance and custom. That’s the dynamic extension of “price
theory,” the Austrian-Hungarian dynamics of discovery by free
people.

It is an odd feature, in other words, of Bauer’s courageous
advocacy for ordinary people having a go, free from the arrogance
of governmental planning and tariffs and industrial policy, that
— sometimes — he was pessimistic on the cultural
score.

Deirdre N. McCloskey is Distinguished Professor of Economics and History Emerita at the University of Illinois at Chicago. This article was originally presented at a conference on “P.T. Bauer: A Hungarian in Cambridge,” March 27, 2018, in Budapest. The conference was organized by the Danube Institute in cooperation with the Hungarian National Bank, the Bruno Leoni Institute of Milan, Friends of Hungary, and the British Embassy.